January 19, 2015

Plastiblends India Ltd - A bull market investment

Plastiblends India Ltd is India's largest manufacturer and exporter of colour and additive masterbatches for the plastic processing industry. The company exports to around 40 countries with major presence in the European, African, South American and Asian markets. The company has a production capacity of 75,000 MT per annum.

Industry:
The masterbatch industry directly benefits from a growing plastic industry. Masterbatch consists of pigments and additives which provide aesthetic looks and functional properties to polymers. The per capital consumption of plastic in India is estimated to be around 8 KG and by 2020 it could go upto 20 KG. It is very low compared to the developed markets and the gulf market. This comes despite the strong awareness to use less plastic. The industry is highly fragmented in India and the organized sector faces stiff competition from the unorganized sector.

The Global Thermoplastic market for 2014 was estimated at 208 million tons. Polyethylene accounted for 38%,Polypropylene 27% and PVC 19% respectively of the Global Thermoplastic market. Demand for these polymers(PE, PP & PVC) grew by 2.3% during 2013 driven by North America and China and marginal improvementin European market. The demand for these polymer products is likely to grow at CAGR of approximately 4%over the next 5 year period. There will be increasing demand towards packaged products, retail, consumerdurables, Automobiles etc. With growing consumption of polymers, the Masterbatch Industry will be a directbeneficiary and the outlook is very good for Masterbatch Industry.

Financials:

The sales have grown at a 5y-CAGR of 22.7% from Rs. 210 Crores in 2010 to Rs. 465 Crores in 2014 and the profits have grown at a 5y-CAGR of 24% from Rs. 10.43 Crores to Rs. 27.24 Crores in the same period. The OPM stands at 10.5% and the NPM stands at around 5.8%. The plastic industry faces low margins due to heavy competition.

The quarterly results show growth on both YoY and QoQ basis for the quarter ended 30th September, 2014.

The equity share capital of the company is Rs. 6.50 crores and reserves stand at Rs. 144.5 crores while debt stands at Rs. 27 Crores as per the filings for quarter ended 30th September, 2014. The company is reducing debt consistently since the past few quarters.

Negatives:
- No pricing power as industry is highly fragmented
- Low margins; OPM has fallen from 14% to 9% levels in the past few years
- Anti plastic awareness can create pressure on the industry
- High volatility in Crude Oil prices can have negative impact on production costs

Positives:
- Market leader in the masterbatch segment
- Industry growing at a very good pace; Expected to grow for the next 3-4 years
- Company maintains a healthy dividend payout; Current yield is attractive
- Low crude oil prices can improve margins
- Improving Return on Equity

Conclusion:
We are in a healthy bull market and all smallcap and midcap stocks with low P/E and high dividend yields are expected to do well. This is a pure bull market investment with a 2 years view at the most and that is why we have not made any sales forecast (Might hold further if performance shows more improvement). This is one of our "Tekno-Funda" picks which consists of stocks that have seen heavy accumulation and rally in the past few months and are still trading at considerably low valuations. Please invest as per your risk capacity. One can divide the investment into Plastiblends India and Poddar Pigments.